'Subdued' hog bounceback ahead

Continued strong demand, lower supplies, and a disease that's trimming productivity in the U.S. hog herd are all lining up to bolster profits for pork producers in the next year, according to a report from Rabobank.

In the bank's quarterly pork report, Rabobank analyst Albert Vernooij says the price increase for producers will be "subdued," but it will at least begin a move away from the profitability erosion that's been underway, profitability sharpened by last year's drought that spiked feed costs and tightened supplies.

"Rabobank expects a positive landscape for the pork industry in the second half of 2013 and into 2014, with limited supply growth . . . and continued high beef and poultry prices. However, high stock levels resulting from the disappointing first half of 2013 across the globe and the continuing effect of the economic crisis on demand will likely limit the price increase," Vernooij says in the Rabobank report. "Together with the declining feed costs resulting from the bumper harvests, a subdued price increase will support much-needed margin recovery across the globe. However, due to the slowness of both the increase of pig prices and the decline of feed costs, it is questionable whether this will be enough to fully cover losses endured in the first half of 2013."

U.S. hog inventories are low, partly because of increased piglet mortality from a new virus, porcine epidemic diarrhea virus (PEDV). And, though it will be temporary, PEDV will help keep a lid on inventories for the next few months.

"While we expect the industry to eventually learn how to manage and minimize the effects of this disease as it has with others, PEDV will likely have a tempering effect on production in the short- to medium-term," Vernooij says.

But supply is not the only factor driving an expected continued recovery. Demand remains fairly strong both domestically and abroad; the former by higher-priced protein alternatives (beef and chicken) for consumers and the latter by potential market growth in the Far East.

"The more recent recovery has probably been driven by a combination of factors, including some sense of improved export potential to China following Shuanghui International's announcement of its intentions to acquire Smithfield," Vernooij says. "Markets are also benefiting from high prices for beef and chicken and more recently, strong demand at retail."

The Shuanghui-Smithfield deal has implications beyond just the home markets for the two companies involved. Vernooij expects the merger to start off a chain of events that could change the world's pork business.

"Going forward, the global pork industry will have to see whether Shuanghui International's announced acquisition of Smithfield may be the first step toward globalization of the sector. Poultry and beef have seen some globalization, but with the exception of Smithfield's investments in Europe, Mexico, and China, pork has undergone little globalization," he says. "To the extent that the transaction concerns security of supply, whether of agricultural commodities or pork, this trend has been driving consolidation in the grain industry for many years and only now appears to be coming to animal protein."